- BOX targets a minimum of $150 million in positive cash flow by fiscal 2017.
- BOX sees $42 billion market opportunity for its Platform strategy.
- BOX guides current revenue in the band of $81-$82 million.
Box Inc. (N:BOX) styles itself as a leading provider of cloud-based file sync-and-share, content management and collaboration solutions. In its latest quarter (F3Q2016), Box delivered revenue that was above expectations and also guided F4Q revenue ahead of the consensus estimate. Although Box is currently not making profits, management has expressed confidence that the company would soon become cash flow positive with at least $150 million in free cash flow by fiscal 2017. Becoming cash flow positive will enable Box to escape cash shortage problems or need for expensive/dilutive fundraisers.
Thinking outside the box
Although there exist compelling growth opportunities for Box, the company understands that nothing will come on a silver platter, which is why thinking outside the box is important. As part of its strategic initiatives, Box is teaming up with technology heavyweights such as the International Business Machines (N:IBM), Microsoft (O:MSFT) and Apple (O:AAPL) to boost its competitive advantage, especially in accelerating adoption of its services.
Besides collaboration, Box is also working to reduce the carrying costs associated with supporting free users, a move that should lower its overall cost structure and improve profit margins over time.
Favorable trends
The shift to the cloud by enterprises is favorable for Box’s revenue growth. The company particularly stands to benefit from enterprise trends such as adoption of cloud-based storage, BYOD and workforce mobility among others. International expansion and continued subscriber grow also widen Box’s topline growth opportunities.
With an expanding subscriber base and continued product innovation, Box is able to both boost revenue growth and accelerate the move to profitability as it ascends subscribers/customers to high-margin services.
The strength in Box
Huge organic growth potential
Box boasts that more than 52% and 28% of Fortune 500 and Global 2000 companies, respectively, use its services. Despite the impressive large enterprise penetration, only a tiny fraction of those customers are already paying to use Box services. The company says that only 16% of the enterprises that use its services are payers and only 2% of the workforce of its large enterprise customers has transitioned to paid subscription. That means that 84% of large enterprises are free Box users and 98% of employees of large enterprise customers still use Box free of charge. While that may mean a huge burden for Box in supporting free users, the opportunity in it is that it presents Box with a compelling monetization opportunity within its install base.
Supporting free users is a heavy burden for Box. The company spends about $9.6 million each quarter or 13% of quarterly revenues in costs related to supporting free subscribers. That explains why converting free subscribers to payers should bring significant boost to Box’s topline and bottom-line numbers.
Nevertheless, despite the huge costs of supporting free users, Box cannot simply cut them off because the free service opens up opportunity for the company to monetize its subscriber base. Moreover, the free offering also helps in brand building, which is important for Box given its competitive industry.
Editing free service plans
With about 13% of quarterly revenue going to support free users, Box has been thinking about a strategy shift that could see the company significantly reduce costs relating to free service.
Internal sales force:In the initial stages, Box relied on influencers to drive the adoption of its services and the strategy worked by elevating the brand profile. However, the company is currently focused on expanding its internal salesforce to drive service adoption, a move that should reduce Box’s reliance on free offering as lead generator.
Introducing free service restrictions: Microsoft recently trail-blazed the path for Box as far as dealing with free service offering goes. The company recently edited some OneDrive storage plans, eliminating and limiting certain paid and free services. To lessen its free support burden, Box can copy Microsoft’s strategy, which involves cutting free storage capacity and encouraging free subscribers to at least partially fund their support or upgrade to high paid plans.
For example, Microsoft in its case dropped the 100GB and 200GB storage packages and instead introduced a 50GB plan that costs $1.99 per month. Additionally, the company decreased the Free OneDrive package to 5GB instead of 15GB. By squeezing the available free storage, Microsoft is encouraging free users to upgrade to paid plans. In comparison, Box offers 10GB of free personal service, which it can squeeze a bit and also encourage existing free subscribers to upgrade their plans. With that, Box can not only lower its free service expenses but also shorten the time to its profitability.
Strategic partnerships: Through strategic partnerships such as those that Box already has with IBM, Microsoft and Apple, the company is able to increase exposure to enterprise decision-makers, thus increasing sales conversion opportunities and limiting reliance on free users for sales leads.
Platform: Box’s Platform is another great way for the company to lessen its operating costs. For example, through Platform, Box recruits new subscribers through third-party partners, who are responsible for their own marketing costs.
The enriched platform also expands the company’s available market. According to Box’s management, the total addressable market for Platform could reach $42 billion by 2018.
Platform is broad based appeal strategy that also has content, applications and user management solutions built into it. Therefore, there is revenue split arrangement in Box Platform because it involves the contribution of third-parties.
Financials and performance
Box finished its F3Q with nearly $190 million in cash and equivalents. The company also posted a solid revenue in the quarter, which was $78.7 million compared to the consensus estimate of $76.8 million.
For the current quarter (F4Q), Box guided revenue above the consensus estimate at the range of $81-$82 million. The Street on the average is predicting revenue of $80.8 million for the quarter.
The chart below shows Box’s quarterly revenue trend over the last four quarters:
Potential pressures
Competition:In the cloud storage business, Box Inc (NYSE:BOX) competes with deep-pocket rivals such as Microsoft and Alphabet (O:GOOG). Because of the financial wealth of these competitors, they can wage in price wars that Box cannot afford, thus limiting its growth and prolonging its move profitability.
Marketing expenses: As Box pushes to take greater control of its subscriber recruitment process, the company is also taking more sales and marketing costs. Heavy investment in marketing activities can both squeeze margins and introduce cash crunch situation.
Additional financing: Intense competition may prolong Box’s profitability, thus raising the need for additional funding. The problem with debt/equity funding is that they complicate the share structure or introduce extra balance sheet burden.
Bottom-line
Platform, partnerships with heavyweights and tweaking free offerings provide Box with impressive growth and profitability potential.